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May 8, 2012

10 Best Tax States for Small Business

The Small Business & Entrepreneurship Council’s tax index breaks it down, state by state

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As Congress members on both sides of the aisle in Washington wrangle over taxes, small businesses nationwide keep watching the horizon for changes in the tax landscape.

Changes out of Washington may be a long time in coming, but it’s increasingly clear to small business owners that the state where they hang their hats has almost as much tax impact on their bottom line as the Internal Revenue Service. Geography, where taxes are concerned, is destiny.

In response to such tax concerns, the Small Business & Entrepreneurship Council (SBE) released a Business Tax Index on April 16 — just one day ahead of the 2011 federal tax filing deadline. The SBE’s index ranks all 50 U.S. states as well as Washington, D.C., from best to worst in terms of each tax system’s cost on entrepreneurship and small business.

“All taxes matter, whether imposed at the federal, state or local level of government,” writes Chief Economist Raymond Keating in his introduction to the SBE Business Tax Index 2012 report. “They matter to consumers, entrepreneurs, investors and businesses. They matter in terms of a state’s competitiveness. And they matter when it comes to economic growth and job creation.”

Small businesses accounted for 65% of net new jobs created between 1993 and 2009 and employ nearly half of all private sector employees, according to hiring service Thumbtack.com’s Small Business Survey. Also according to Thumbtack, Idaho and Delaware have the most small business-friendly tax codes, while California and New Mexico had the least friendly codes.

Which states does the SBE identify as the friendliest? Read on for the top 10 best states for small business in reverse order, ranked highest on SBE’s list of 18 taxes, including personal income, individual capital gains tax rate, corporate income, corporate capital gains, added income tax on S-corporations, property taxes, unemployment taxes and sales taxes. (Keating notes that the personal income tax influences business “far more than generally assumed” because more than 92% of businesses file taxes as individuals, such as sole proprietorships, partnerships and S-corps, and therefore pay personal income taxes rather than corporate income taxes.)

Tax rates of all 50 states and the District of Columbia are ranked from 1 to 51, 1 being the lowest, or best, rates.